Two chief developments have brought in news the concept of short selling, which quiet a few investors having a bearish approach resort to. One: the news of allowing mutual funds to short sell.
And two: a crucial indication that the markets themselves have been giving; by increasing in a range and decreasing substantially quite often.
Hence, considering the second factor, which is a strong basis, it is timely to understand and apply as to what entails ?short selling? and how you as an investor can benefit from it, if the current trend demonstrated by the markets continues.
What it entails?
When an investor goes long on an investment, it means he has bought a stock believing its price will rise in the future. And when an investor goes short, he is anticipating a decrease in the share price.
Short selling is the selling of a stock that the seller doesn?t own. More specifically, a short sale is the sale of a security that isn?t owned by the seller, but that is promised to be delivered. When you short sell a stock, your broker will lend it to you. The stock will come from the brokerage?s own inventory, from another one of the firm?s customers, or from another brokerage firm.
The shares are sold and the proceeds are credited to your account. Sooner or later you must ?close? the short by buying back the same number of shares called as ?covering? and returning them to your broker. If the price drops, you can buy back the stock at a lower price and make a profit on the difference. If the price of the stock rises, you have to buy it back at the higher price, and you lose money.
Most of the time, you can hold a short for as long as you want. However, you can be forced to cover if the lender wants back the stock you borrowed. Brokerages can?t sell what they don?t have, and so you have to come up with new shares to borrow, or you?ll have to cover. This is known as being ?called away?. It doesn?t happen often, but is possible if many investors are selling a particular security short.
Since you don?t own the stock (you borrowed and then sold it), you must pay the lender of the stock any dividends or rights declared during the course of the loan. If the stock splits during the course of your short, you?ll owe twice the number of shares at half the price. Also, because you are being loaned the stock, you are buying on margin. In fact, you have to open a margin account to short stocks.
To be concluded next week
